If new, innovative, distributed-generation (DG) technologies are available that could lead to better, more efficient and more profitable ways of producing and delivering power, why have they not been commercialized and adopted far more extensively?

Today I want to consider one part of the answer to this question: utility rate structures. If not properly designed, utility rate structures can create obstacles to DG that serve the narrowly defined, short-term interest of utilities at the expense of the long-term interest of society overall.

Let's begin with standby fees. These are charges imposed by the utility company for the privilege of having electricity on standby in the event the DG goes down for any reason, whether the consumer wants it or not. Standby fees can kill the economics of DG , even in instances where the only back up required is for planned-maintenance outages.

A few years ago, I was investigating the possibility of a stationary fuel cell project for Cleveland State when we ran straight into this obstacle. Together with the leadership in the university's physical plant, I brought in a fuel cell firm that told us it could install a fuel cell similar to others already in use at various locations around the world. The firm quoted a price per kilowatt-hr that, were it not for the additional cost attributable to the standby fee, may have made economic sense for the university. Today, our physical plant managers are looking at possibly acquiring power from a combined heat and power plant (CHP), another DG technology, and they may well discover that standby remain a barrier that cannot be overcome.

Buyback rates pose yet another regulatory barrier.

DG technologies may generate more electricity than is necessary for on-site consumption, either continuously or intermittently. If the on-site generation is renewable and the excess power is intermittent, it can be net metered. That is, the generator can receive a retail credit for the excess electricity they generate. But if it is not renewable, such as is the case for CHP, or if the excess power is ongoing, there is no net metering available.

In those circumstances, the generator has to sell the power to the utility. Under our current regulations, the utility need not pay for the strategic value of the location of the generation, but rather only the cost of some distant, displaced centralized generation, such as from a large-scale nuclear power plant. Utilities have incentive to account for these costs as being as low as possible. The electrons from the DG may only travel 100 yards to a neighboring consumer, but it will be valued as though it traveled 50 miles from a nuclear power plant.

What can be done to implement utility rate structures that more adequately support DG projects? California, New York, Illinois, Massachusetts, Oregon, and Connecticut have all made changes to their utility rate structures explicitly designed to ensure fair and reasonable treatment for DG projects. Options include self-generation portfolios; rate designs that “decouple” utility profits from sales volume; use of performance-based rate structures; ensuring that rates are based upon accurate estimates of the full costs and benefits of DG; and ensuring that benefits such as increased system capacity, deferral of transmission and distribution investment, reduced system losses, and improved stability from reactive power and voltage support are built into rate structures.

Currently, the Public Service Commission of Ohio (PUCO) is looking at how to structure its rules for CHP, in light of the passage of Senate Bill 315. Standby rates are a part of this investigation. Presumably — hopefully — so are buyback rules. I would like to see PUCO convene a working group of interested stakeholders in Ohio to help it establish rules favorable to the advent of DG projects. I would think that this group might include, among others, First Energy and the other utilities, the Ohio Manufacturer's Association, the Industrial Energy Users of Ohio, the Ohio Consumer's Council, residential aggregators like Northeast Ohio Public Energy Council, as well as state economic development authorities.

Perhaps a conversation amongst these groups would lead to a reduction in some of the unnecessary obstacles.

William M. Bowen is professor of public administration and urban studies at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University. He's also associate editor of the International Journal of Energy Technology and Policy.